The Postal Service could become the first federal agency to fully fund retiree health benefits, if lawmakers act on a proposal sent to Congress Tuesday. But at least one significant roadblock stands in the way-a conflicting set of recommendations from the Treasury Department.

Both agencies, along with the Office of Personnel Management, were required to submit the proposals to Congress as part of a law that adjusted Postal Service payments to the Civil Service Retirement System. OPM's recommendation was not available and agency officials did not respond to calls for this story.

The adjustment was made earlier this year after it was discovered that the Postal Service could end up overpaying its CSRS obligations by more than $70 billion. By lowering contributions, the law saved the Postal Service $2.9 billion in fiscal 2003 and $2.6 billion in fiscal 2004. As a result, the agency pledged to keep postal rates flat until calendar year 2006.

But starting in fiscal 2006, savings generated by the law must be placed in an escrow account, unless Congress decides otherwise. The agency would have to transfer $3.2 billion into the escrow account by Oct.1, 2005. The Postal Service is also on the hook for paying $27 billion for employees' military service.

In its recommendation to Congress, the Postal Service recommended abolishing the escrow account and transferring the military portion to the Treasury Department, similar to other federal agencies. Doing so would generate $10 billion in savings, or overpayments to the CSRS, according to the agency's chief financial officer, Richard Strasser. The agency would then use that money to fully fund retiree health benefits for all its employees.

If Congress approves the proposal, the Postal Service will have addressed one of the biggest financial liabilities on its books, Strasser said during a briefing with reporters. The agency has nearly $92 billion in unfunded debt and obligations; about $48 billion is related to retiree health benefits. How the Postal Service pays for health benefits has long been a concern of the General Accounting Office, as well a presidential commission which recently concluded a six-month review of postal operations.

Requiring the agency to pick up the tab for military service "is not justified because the majority of this cost relates to military service performed before the creation of the Postal Service," the Postal Service argued in its recommendation.

Treasury, however, took a different view. In its proposal, the department noted that the Postal Service is required to pay for all employee benefits through postage rates. "The benefits attributable to military service are a retirement benefit that postal employees receive just like other benefits," Treasury noted.

The department recommended that the Postal Service pay a pro-rated share of military benefits for employees hired before July 1, 1971, the date that the Postal Service became an independent agency.

Postal Service officials declined to comment on Treasury's proposal, but said they were studying it. However, in its submission to Congress, the Postal Service included an alternative plan, which assumed the escrow remained and that the agency would still be responsible for the military portion of retiree benefits. Under that scenario, the agency would use some of the money in escrow to prefund benefits for retirees hired after 2002. The remaining portion of the account would be used to help pay for general agency operations.

To pay into the escrow, however, the Postal Service would have to raise rates by 5.4 percent in fiscal 2004. That does not include the need to cover operational costs or take into account declining mail volumes. The escrow requirement would cause bi-annual rate increases between 1 percent and 1.5 percent for the next 15 years, according to the agency.

All the proposals on the CSRS funding were sent to the General Accounting Office, which has 60 days to review them and submit a recommendation to Congress.

Strasser urged lawmakers to act quickly. Any delay could impact the agency's ability to calculate the size and timing of its next rate increase. The changes will have no impact on the level of health benefits offered to retirees.